Saturday, November 15, 2008

H P Minsky, 77, Economist Who Decoded Lending Trends

by Louis Uchitelle

New York Times (October 26 1996)

Hyman P Minsky, an economist and professor who explained, in path-breaking research, how lending patterns and mood swings can push an economy into speculative booms or steep declines, died on Thursday at Northern Dutchess Hospital in Rhinebeck, New York. He was 77 and lived in Rhinebeck.

He died of pancreatic cancer, his family said.

For the last six years, Professor Minsky was Distinguished Scholar at the Jerome Levy Economics Institute of Bard College, an independent institute on the Annandale-on-Hudson, New York, campus, where he had continued his research on debt and the economy.

One of his final papers argued that big industrial economies like that of the United States need $2 trillion or $3 trillion in national debt so cautious lenders who want guarantees of repayment can achieve this by buying the Government's very safe Treasury bills and bonds. Without such opportunity, he said, the Social Security Administration would lack a safe place to invest the payroll taxes of working Americans until they are paid out in pensions.

Mr Minsky was sometimes described as a radical Keynesian whose research nevertheless endeared him to Wall Street.

"He offered very good insights in the 1960s and 1970s when linkages between the financial markets and the economy were not as well understood as they are now", said Henry Kaufman, a Wall Street money manager and economist. "He showed us that financial markets could move frequently to excess. And he underscored the importance of the Federal Reserve as a lender of last resort".

Mr Minsky's best-known work came in the late 1960s and early 1970s while he was a professor at the University of California at Berkeley and then Washington University in St Louis. John Maynard Keynes, the British economist, had written about unstable financial markets, but Mr Minsky was the first to explain how this instability developed and interacted with the economy. In doing so he incorporated findings of Irving Fisher and other earlier economists.

Basically, Mr Minsky found that in prosperous times, when corporate cash flow rises beyond what is needed to pay off debt, a speculative euphoria develops and soon lending gets beyond what the borrowers can pay off from their incoming revenues. That produces a crisis. There is a pull-back in lending, even to companies that can afford the loans, and the economy contracts.

"A fundamental characteristic of our economy", Mr Minsky wrote in 1974, "is that the financial system swings between robustness and fragility and these swings are an integral part of the process that generates business cycles".

Disagreeing with many mainstream economists, he argued that these swings, and the booms and busts that can accompany them, are inevitable in a free market economy, unless Government steps in to control them, through regulation, central bank action and other tools that in fact came into existence in response to the Depression. He opposed the deregulation that characterized the 1980s.

It was at Berkeley that seminars attended by Bank of America executives helped him to develop his theories about lending and economic activity, views he laid out in two books: John Maynard Keynes (Columbia University Press, 1975) and Stabilizing an Unstable Economy (Yale University Press, 1986).

Hyman Philip Minsky, who was born in Chicago, graduated from George Washington High School in upper Manhattan. He received a bachelor's degree in mathematics at the University of Chicago in 1941, but influenced by Henry Simon, a revered economist, he shifted fields and received a doctorate in economics at Harvard in 1954, specializing in finance.

Mr Minsky is survived by his wife, Esther, a son, Alan, and a daughter, Diana, all of Rhinebeck.